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FX Majors Weekly Outlook (5-9 September)

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FX Majors Weekly Outlook (5-9 September)

<p class="MsoNormal">UPCOMING
EVENTS:</p><ul><li>Monday: US
Labor Day Holiday.</li><li>Tuesday: RBA
Policy Announcement, US ISM Services PMI.</li><li>Wednesday:
BoC Policy Announcement.</li><li>Thursday:
ECB Policy Announcement.</li></ul><p class="MsoNormal">Following
the Jackson Hole blues, the risk sentiment in the last week remained on the
defensive side. The US Dollar appreciated against most major currencies,
failing to gain decisively only against the Euro. The Euro resilience is pretty
much all caused by ECB members talking up the 75-bps hike coming at this week
policy meeting. Nonetheless, the global slowdown, aggressive monetary
tightening and energy crisis in Europe doesn't bode well at all for the single
currency. </p><p class="MsoNormal">Last week we
also got two important economic reports: the ISM Manufacturing PMI and the
Labour Market report. The ISM report surprised with an overall good reading,
showing increases in components like new orders and employment and another big
decrease in prices paid. That's kind of a goldilocks print, although one good
report after a series of bad ones has to be taken with a pinch of salt and it
doesn't change much for the Fed as the resilience may just give them comfort to
"keep at it". </p><p class="MsoNormal">The Labour
Market report was also benign, beating expectations on jobs added but missing
on the unemployment rate, which climbed to 3.7% from 3.5% although the
participation rate increased as well, so all in all a good report. Wages data
came out as expected and fears of a wage price spiral at this point may be
overblown. Again, overall, this report doesn't change anything for the Fed and
the next big event will be the US CPI report on the 13th of
September. </p><p class="MsoNormal">On Tuesday,
the RBA is expected to raise rates by 50 bps bringing the Cash Rate to 2.35%.
The RBA already stated several times its commitment to bring inflation down to
target of 2%-3% range and that it will take further steps in the process of
normalising monetary conditions. On the AUD/USD 4-hour chart below, the price
broke down through the previous swing low support at 0.6869, which also looks
like the neckline of a head and shoulders pattern. We may see the price pulling
back to the neckline or the trendline ahead of the RBA meeting and then falling
from there for a continuation of the downtrend with a possible break of the
previous low at 0.6682.</p><p class="MsoNormal">We will also
get the latest ISM Services PMI, expected to weaken further amid high inflation
and tighter monetary conditions. The market will be obviously more focused on
the prices paid component. </p><p class="MsoNormal">On
Wednesday, the BoC is expected to hike by either 50 bps or 75 bps, with a bit
more weight leaning to the larger move bringing the rate to 3.25%. As for the
Fed, the BoC wants to frontload interest rates hikes and bring them to a
restrictive level, which they estimate to be a bit higher than 3%. On the
USD/CAD 4-hour chart below, the price has pulled back from the 2022 high at
1.3224 and looks like it could go back to the trendline before continuing its
slow uptrend and break the 2022 high. We may see the price pulling back ahead
of the BoC meeting.</p><p class="MsoNormal">On Thursday,
there will be the biggest event of the week: the ECB monetary policy
announcement. A couple of weeks ago the market was expecting a 50-bps hike by
the ECB in September, but the expectations changed immediately when on the 26th
August a report came out revealing that "some policymakers wish to discuss a 75
bps rate rise due to the deterioration in the inflation outlook, with the
prospect of a looming recession not a justification for slowing or halting
policy normalisation". After that ECB members started to talk about a 75-bps
rate rise in September as a likely move and Eurozone inflation data climbing
further reinforced the bigger hike probability. </p><p class="MsoNormal">The bleak
economic outlook for the Eurozone amid tighter monetary conditions, high inflation
and energy crisis look like a win-win for Euro bears. If they hike
aggressively, they will just worsen the economic outlook and if they chicken out,
they will prolong the stagflation or worse lose any credibility as inflation
fighters and lose control of inflation expectations. On the EUR/USD 4-hour
chart below, we can see how once the price came to the 1.0350 strong resistance
area, it faded completely not only the US CPI spike but also the one-month-long
relief rally we saw in July and August. Right now, the price is contained in a roughly
200 pips range between the low at 0.9900 and the high at 1.0090. It's been sort
of a reliable pattern lately to see EUR/USD climbing into the ECB meeting and
then selling off out of it. It's very likely that we will see the same
happening this week and once the price breaks decisively the 0.9900 low, it
could be free fall until 0.9700, unless a very weak US CPI report spoils the
party the next week. </p><p class="MsoNormal">This article
was written by Giuseppe Dellamotta.</p>

This article was written by ForexLive  at

Source: FX Majors Weekly Outlook (5-9 September)
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